What is the difference between tax avoidance and tax evasion? The simple difference is that avoidance is legal and evasion is illegal. However, aggressive avoidance schemes can be challenged by HMRC and can result in a legal challenge, penalties and a hefty tax bill. It is not always clear cut so it is important to seek professional advice if you are planning something out of the ordinary. So, how you or your business operates and handles its tax affairs is essential to ensure legal compliance.
WIDELY ACCEPTED TAX AVOIDANCE SCHEMES.
- Charity Giving
- Pension Contributions
- ISAS
- Setting up a company and paying dividends instead of a salary
- Moving abroad to a country with lower tax rates
- Gifting family members to avoid Inheritance Tax.
Any of the above will be allowable by HMRC and payments or contributions will be documented within HMRC. These are legitimate tax savings schemes and accepted by HMRC.
AGGRESSIVE TAX AVOIDANCE
- Tax avoidance schemes falling under General anti abuse Rules (GAAR).
- A tax avoidance scheme for reducing tax that wasn’t intended by parliament.
- An investment that relies on a venture being unsuccessful for the purpose of tax relief.
These 3 schemes above sit halfway between tax planning and tax avoidance. They are usually set up as “Unregulated Collective Investment Schemes” (UCIS). Given HMRC’s stance on aggressive tax avoidance you will be well advised to avoid schemes of this nature.
TAX EVASION EXAMPLES
- Concealing or withholding key information from HMRC.
- Not declaring or under declaring earnings.
- Not declaring cash or crypto currency transactions.
- Falsely claiming for expenses.
- Charging VAT to Customers and failing to declare the output VAT to HMRC.
- Importing goods and failing to pay the duty.
It’s important that advice is sought before entering into any unusual investment schemes, especially one that looks too good to be true. Always talk to your accountant or advisor to ensure that you are not investing in a scheme that could result in a higher tax bill later on.
Roger Gunning FCMA CGMA
Cheltenham Office